Land/Building Cost Ratio?

I have a piece of inner city land in the San Francisco Bay Area. It is vacant and near good apartment developments.

The land next to me (also vacant) has just gone under contract with a builder to develop condos in the $400,000 sale range. This is right next to me, as in they touch.

He doesn't want to pay me enough to include my land in the development even though he could add at least a dozen more units.

My question... Is there a rule of thumb as to the ratio of land acquisition cost vs either building cost or final sale costs? Because I can't understand why he wouldn't want to add to his profits since he is already paying fixed costs that could be further amortised over the additional units if he bought my land.

If a rule of thumb, for instance, was that land costs about 10% of construction costs or something I could better gauge how far off I might be.

b.

Posted by: loanuniverse Dec 19 2004, 03:06 PM

I might be able to get back to you on that after talking to a commercial real estate lender. Off the top of my head, I remember a couple of recent deals that might give you some kind of idea.

1-A 16 townhouse development to be sold for about $700,000 per unit the land portion came out to $125,000 per lot.

2-A 30 townhouse development to be sold for about $250,000 per unit. I think the land portion was around $50,000 per lot.

You should really have the land appraised or at the very least look at comparable sales.

Posted by: Boont Dec 21 2004, 12:55 AM

Thank you so much for replying.

If I understand this example correctly the land cost was approx. 17% of the value of the total sale price of the condos.

The deal I am looking at is more like 8% of the expected total sale price and they refuse to budge a penny.

My example is a single urban building with about 40 condos, not townhouses, but that still seems to be a big difference.

I must be missing something here.

b.

Posted by: The Fox Dec 21 2004, 12:21 PM

Perhaps this is stating the obvious, but geographically land costs should vary more widely than constuction costs. (Not that construction costs are static, but you know what I mean.) That makes a catch-all ratio very difficult to make.

My suggestion is to talk with a commercial real estate professional in your area. I'd think you'd be able to get a ballpark number for the land, and representation for this deal. He'd get his cut, but you'd benefit from his/her experience in the discussions/negotiations.

Other thoughts: Maybe the developer thinks he can get your piece later, once some some cash has been freed up. Is there any reason for the developer to think your parcel WON'T be available in the future? Maybe the developer (for whatever reason) simply can't buy your parcel (and additional associated development costs) for more right now.

Posted by: loanuniverse Dec 21 2004, 01:46 PM

I spoke to one of the commercial real estate lenders about it and he told me that there is no rule of thumb when it comes to land cost as a percentage of total costs. In fact, you could have one project where land is 15% and another one where land could be 25% even if the plans for the condo building are the same depending on how desirable the location is. The only thing that he did tell me is that it would be extremely rare for land to be over 30% of total construction costs.

The question here is: can your parcel by itself be developed or is it valuable only to this developer so that he can join both to build something bigger? The other question would be, can you wait it out until you get a price that you like?

Nothing that we say here without knowing the property or the market could be used as an argument for negotiations. If your parcel can be developed by itself and his project is a success, all that can happen is that your property will increase in value a couple of years from now. Whether or not your property is desirable to another developer is the key.

Posted by: Boont Dec 22 2004, 02:50 AM

Thanks again for the responses. It does help me understand this.

Yes, I can wait and my land can be developed by myself or someone else after the current project is done, or even now if I so choose. It will also be more valuable when this project proves that condos work on this block (if that is the case, which I think it will be).

I have just been unable to understand why this builder can not profit greatly by increasing the number of units he can build with the extra land and therefore offer a better deal. That is why I asked about land costs vs building construction costs. I thought maybe land costs could only be say 5% of the total to make economic sense to a developer. But that does not appear to be the case.

Obviously vacant land that is suitable for condo construction in the San Francisco Bay Area is both scarce and valuable. Additionally, since the number of units is strictly limited by the size of the parcel being developed, it would seem that one would be unwise indeed to ignore that opportunity.

I think it is also true that this area would be nearer to top of the averages for land costs (15 to 25% was mentioned). So my offer of 8% in a hot urban area like this seems way wrong.

However, this would not be the first time I have seen "so called" professionals make huge errors of judgement.

I have leased and sold property for prices "professionals" have told me could not be gotten. Fortunately, I didn't listen to them, exclusively.

But for the life of me, to see a project in this area with an 8% price of land to building cost ratio be stalled out, well it makes me think that the builder is indeed not as smart as he thinks. And if he was just playing coy he should have reappeared by now.